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What the Saudis Aren't Telling Us

Energy and Capital's Weekend Edition

Written by Keith Kohl
Posted June 2, 2012

Suffice to say the triple-digit oil prices we've seen over the past few years have been good to the Kingdom of Saud.

By the end of next year, Saudi assets are projected to top $1 trillion.

When two-thirds of your income is tucked away in your oil industry, it allows you to increase spending on other things, namely education, health care, jobs and infrastructure...

At least we'll have a front row seat to their fall.

Saudis' Fading Fortune

Ever wonder what it takes to give a Saudi prince nightmares?

Here's a hint...

wti-brent prices 6-2click to enlarge image

What could possibly hurt the Saudis' purse more than this?

Together, WTI and Brent crude prices have fallen about 20% during the last thirty days, despite the fact that summer is upon us.

But it shouldn't be the crude price slide that has them worried...

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The real concern here is on the demand side of things.

What will happen when everyone suddenly realizes things aren't going so well for OPEC members?

And when global demand rebounds, how soon will it be until the spare capacity dries up?

opec spare capacity

Although Saudi Arabia's oil production is chugging along at more than 10 million bbls/d, OPEC spare capacity is at its lowest point since 2008.

And there's another problem hidden in the details. Saudi spare capacity — which stands at a little more than two million barrels per day — isn't the light, sweet crude the refiners prefer...

Remember when 1.5 million bbls/d of Libyan oil was taken off the market last summer?

We got a good taste of the poor quality of their spare capacity.

The heavy, sour oil coming from Saudi fields was a poor replacement for the light, sweet Libyan supply — especially considering European refiners weren't equipped to handle it...

Not to mention the fact that domestic demand in OPEC countries has been on the move:

opec domestic demand

In 2010, Saudi Arabia's oil demand increased to 2.4 million barrels per day. At this pace, they'll be consuming more than three million barrels per day in three years — and over four million barrels per day by 2020.

It's a good thing we won't be begging them for more oil going forward...

While the Saudis are adding extra-heavy, sour grade crude to their production, we've admittedly had it better.

By now, the resurgence taking place in the North American oil industry is more than just hype.

The 6.2 million barrels of crude projected to be pumped out of U.S. oil fields this year will the most since 1998 — making now the perfect time to go long on oil stocks.

Enjoy your weekend,

Keith Kohl
Editor, Energy and Capital

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